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Thursday, May 28, 2009

Danske Bank Warn On The Baltics

Danske Bank has issued the following advice to investors:
The event risk has risen sharply in the Baltic markets and we advise utmost caution. Yesterday, the Swedish central bank Riksbanken said it will increase its currency reserve by SEK 100 bn through a loan from the Swedish debt agency. Investors seem to believe that this is a buffer to deal with potential problems arising from the Baltic crisis.

No comment.

The krona fell for a third day after the Riksbank announced the loan, and declined more than any of the 16 most-traded currencies against the dollar and the euro. Stefan Ingves, central bank governor, said in the statement that the financial crisis may be “prolonged”. Since the start of the financial crisis, Sweden has spent 100 billion kronor on swap agreements with Iceland, Estonia and Latvia and on dollar injections into Swedend's financial system.

Swedish banks have claims in Latvia, Lithuania and Estonia amounting to about $75 billion, according to ING Groep NV, with SEB, Swedbank and Nordea accounting for 53 percent of Latvia’s lending market. Sweden’s central bank raised the amount of euros available for the Latvian central bank to swap for lats to 500 million euros ($670 million) at the start of May. Latvia’s central bank first entered the swap agreement with both its Swedish and Danish counterparts to borrow as much as 500 million euros for lats last December. The Riksbank was to provide 375 million euros and the Danish central bank the remainder.

Latvia has already spent over 500 million euros buying lats this year to support the currency.

Earlier this week the New York Times Economix Blog said the following:
The jury is still out on whether Latvia can do what it takes to rebalance its budget and qualify for the bailout money it received from the International Monetary Fund and the European Union. Take a look at this analysis of Latvia’s situation from Danske Bank, which has consistently offered hard-headed – that is, pessimistic – views of the Baltic nations of Latvia, Lithuania and Estonia. (The bank was also far ahead in calling the disaster in Iceland.)

The most interesting aspect of the story, from a global perspective, was the notion that a default — even by a small country — could trigger a cascade of bad news at a time when the financial situation appears to be easing.

Let us just all hope that this last mentioned "notion" remains just that, "an interesting notion".

Meanwhile, Swedish media seem to be treating the devaluation as almost a "fait accompli" - those of you who don't speak Swedish can try putting this and this through your Google translator if you are interested.


Anonymous said...

Productivity in Estonian manufacturing is 17000 EUR/employee
and in Finland manufacturing 80000 EUR/employee. Almost five times higher in Finland.

Please, how can devaluation help to compete, if productivity is so low?

Edward Hugh said...


"Please, how can devaluation help to compete, if productivity is so low?"

Well obviosuly you need serious structural reforms, and skill and educational upgrading to improve the productivity and the human capital base of the society. That is obvious.

Devaluation won't do this. This is a political process you now need to go through yourselves. That is the only way to higher living standards, not a ridiculous property binge.

What devaluation can do is buy you time to make the changes, since your export oriented sector can become much cheaper overnight. They stay with just such low productivity, but they can sell more since they compensate by cheap price.

Devaluation can help you turn this contraction around. Otherwise it can go on and on, especially with the need to keep cutting government spending.

Anonymous said...

At first I rejected the idea of devaluation completely, but now, when they started to talk about cutting pensions, I am not so sure anymore.
Cutting expenses and wages does not seem to help export. May be it would be indeed more rational to devaluate the currency a little bit instead. With wage cuts the buying power of people decreases anyway, but export stays as it is?